August, 2002 Newsletter
+++++++++++ August 1, 2002 +++++++++++++++++++
Introduction: Mixed Readings on Home Sales
Mortgage Rate Update: Rates at Historic Low
This Month's Tip: A Common Sense Approach
Introduction: Mixed Readings on Sales
Welcome to the August edition of the Home Buyer's Newsletter.
Home sales in June were definitely a mixed bag, with new home
sales up 0.5% (to a record annualized pace of over one million).
At the same time, though, existing home sales dropped nearly
12%, the largest decrease since 1995. This indicates an
annual rate of 5.07 million units.
What do the numbers mean? They could indicate nothing more
than a one month anomaly. Or, they could signal that the market
is slowing a bit, since the lead time on new home construction
is longer than for the purchase of an existing home. It surely,
though, is something that bears watching in the upcoming months,
especially since sales have been so strong for the last two years.
A decline in sales rates could indicate a future softening in price
Mortgage Rate Update: Rates at Historic Low
Due to a large degree to the rush out of the equities market and
into the bond market, both 30-year and 15-year mortgages were
at historic levels at the end of July. According to mortgage
company Freddie Mac, 30-year fixed rate mortgages averaged
6.34% as of July 25th, while 15-year fixed rates dropped to
5.76%. These rates do not include any points paid to the lender
Betting on lower rates from this point out could be a real gamble.
The odds seem to be stacked much higher that rates will
either stabilize from this point or begin to rise again, even if
it is a slow climb. If you are in the market for a home, it would
probably be wise now to take a good look at your personal
financial situation as well as where you are in the home hunting
process, to see if the present is not a good time to make a
For current average mortgage rates, see:
Current Mortgage Rates
For more information on mortgages, visit the Mortgage
IPlace.com, the largest supplier of credit reports
on the Internet, has a number of options to quickly
get a copy of your report. You can get a single
report, your credit score, a full 3-bureau report or
even a free copy of your credit report, quickly and
easily. See more information here.
This Month's Tip: A Common Sense Approach
Buying a home is an emotional time--you'll experience both
highs of emotion (like when you find a house you love) and
lows of emotion (like when the mortgage company wants
"just a little more information"). There is no real way to
avoid the emotional swings you will encounter, but the CAN
keep them in check. The easiest and most effective way
of doing that is to simply take a common sense approach
to the whole home buying process.
Throughout the Home Buyer's Information Center site, and
in dozens of our newsletters over the past 3 years, we've
campaigned for this common sense approach. Why?
Because it will be the homebuyer who will gain the
rewards if they keep the process within the bounds of
common sense--or, who will suffer the pain if they don't.
Not the lender, not the Agent, not the appraiser, not
the insurer, but you, the home buyer.
Common Sense Qualifying Ratios
This is the first place that common sense frequently gets
thrown out the window, and it can be where the most
financial damage occurs.
Qualifying ratios indicate your ability to pay a mortgage.
One ratio, the front ratio, is determined by the lender by
taking the amount of your proposed total mortgage payment
and dividing it by your total monthly income. For example,
say you are looking at a total montly payment (including
principal, interest, taxes and insurance) of $1025 per
month and you have a total income--before tax--of $4000
per month. The ratio of your mortgage payment would be
25.6% of your income. A second ratio--the back ratio--
is also determined by the lender. This is your total
monthly debt (including credit card payments, car loans,
student and personal loans, etc.) PLUS the proposed
mortgage amount. Say you have an additional $395 in
monthly debt payments. Your total debt, then, would be
$1420 ($395 plus the $1025 mortgage) and using the
same income figure of $4000, your back ratio would be
Although they vary by type of mortgage selected, these
ratios have traditionally been around 30% or less for
the front ratio (total mortgage payment) and 41%
or less for the back ratio (total debt payments).
These ratios were time-tested over the years because
those who qualified under those figures had a better
chance of NOT being faced with foreclosure. Recently,
though, we've watched as those qualifying ratios have
crept upward, especially for good credit buyers.
The risk, however, is obvious. The more of your income
you devote to your housing costs, and to your total debt
payments, the less you will have available for other needs
or, perhaps most important, for savings. You run the
very real risk of finding yourself "house poor"--a nice
house but little or no money left over for enjoyment
(or, in the worst case scenario, for an unforeseen
The common sense approach: Don't bury yourself
in house payments that can cause problems down
Common Sense Prices
Repeat the following several times: "Real Estate does not
always go up. Real Estate does not always go up. Real
Estate..." Got it? Like those with very short points of
reference who figured that the U.S. stock market was on
and endless upward ride (and who found out, painfully,
that they were wrong) we now hear a growing mantra that
"Real Estate is the perfect investment vehicle. It always
goes up in value." Sounds great, even if it is not true.
Yes, in the long run the trend in prices is up. That does
not mean, though, in shorter periods of time--like less
than 10 years--that prices are always increasing.
Do we think that there will be a crash in Real Estate
prices? Absolutely not. Do we think, though, that
in areas where appreciation has been at a breakneck
pace over the last couple of years that there could be
at least a period of stagnation if not outright declines.
Very possibly. Do we think that paying too much for
a home can bite you hard in such an environement?
Prices for all investment vehicles--whether they be
stocks, bonds, soy bean futures or homes--tend to
move in cycles. Ask folks who owned homes in areas
of Texas, California or New England in the 1980s and
see if they don't agree. A prime example is Houston,
where average prices peaked in 1983 and then proceeded
to fall in 1984, 1985, 1986, 1987 and 1988. They began
rising again in 1989, 1990, 1991 and 1992 but it was not
until 1993--a full 10 years after the peak--that they
returned to the average pricing of 1983.
Since values CAN stagnate or go down, it is imperative
that a buyer not pay more than a reasonable market
value. Sounds fairly obvious, but every day we watch
buyers, caught in the heat of the moment, pay thousands--
and sometimes TENS of thousands--more than a house
is worth. Part of this is probably due to the buyer not
having a clear idea of what the true value is and part of
it is due to bidding wars that push prices beyond--and
sometimes ludicrously beyond--listing prices and true
The common sense approach: Have all pricing information
in hand BEFORE you begin negotiations on a home.
NEVER get caught in a bidding war unless the home is
priced considerably BELOW market value. For more
information, see the section of the site devoted to determining
a fair value.
Common Sense Buying for Resale
Be careful not to get so involved in "the moment" that you
buy (or build) a "dream house" that may not be anyone
else's idea of a dream. It is much better to stick with
what is tried and true (and then personalize that home to
your tastes) rather than to be groundbreaking and
unusual. For example, a 2 bedroom 4 bath house may
be just what you've been dreaming of, but will be very
difficult to unload when it comes time to sell.
In addition, try to avoid the latest "trendy" fashions in
homes. Today's trends are tomorrow's has-beens. What
is fresh and "up-to-date" today tends to look very dated
just a few years down the road. Remember all white
kitchens? A few years ago EVERYBODY seemed to want
an all white kitchen. Now, they are becoming harder and
harder to find, as buyers have moved to new (and different)
The common sense approach: Stick more with what is
"timeless" and less with what is "timely".
Buying a home will likely be one of the happiest moments in
your life. Take some time, though, to "take a breath" (with a
good dose of common sense) to make sure that the time you
spend LIVING in the house is every bit as happy as when you
first moved in.
The Home Buyer's Checklist
Many of our visitors have said that one of the most valuable
aspects of the Home Buyer's Information Center is the
Buying Checklist, where they can make sure that all
the bases have been touched. You can find
As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer's
Information Center to successfully purchase a home),
drop us a quick line here.
or access our feedback page.
A special thanks to all those who have written to let us know
that they have found the Home Buyer's Information Center a
helpful resource in their buying process.
Have a great month and good luck in your home buying process!
The Team at the Home Buyer's Information Center